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How Much Coverage Do You Need For Adequate Protection?

The process of purchasing life insurance can be confusing and seemingly contradictory. Potential buyers of life insurance tend to be middle class people with some disposable income but relatively little in the way of long-term savings. As such, their life insurance purchasing decisions often require them to compromise between ensuring ample coverage for their families and keeping their monthly premiums at affordable levels.

You May Be Less Covered Than You Think

Most Americans without a generous stash of retirement savings feel as if they lack adequate coverage. According to LIMRA, a leading advocacy group for the life insurance industry, the average American household owns enough life insurance to replace their income for 3.5 years. While this sounds like an adequate amount, LIMRA found that typical policyholders would prefer to increase their coverage to at least 6.8 times their annual income.

How Can I Determine How Much Coverage I Need?

Depending upon the demographics of their clientele and their own personal opinions, financial advisers may recommend one of several formulas for determining adequate life insurance coverage. One of the simplest is the income-multiple formula: Using this technique, life insurance shoppers simply buy enough coverage to replace their pre-tax earnings for a specific number of years.

Some experts within the life insurance industry insist that eight to 10 years of income replacement is necessary. On the other hand, many financial advisers who advocate frugal living recommend purchasing coverage for just five to seven years and building up a nest egg on top of that.

However, these rules of thumb tend to overgeneralize. In order to avoid paying high premiums for coverage that they don’t need or purchasing inadequate coverage to save on premium payments, life insurance shoppers should consider their individual needs before settling upon a specific policy.

Of particular importance are the potential policyholder’s age and lifestyle choices. Relatively young life insurance shoppers who remain in good health may wish to purchase ample coverage while they can still afford to do so. As policyholders age, however, their rates rise dramatically.

Be Prepared to Consider Future Expenses

Before arriving at a final number, shoppers must consider their family’s future expenses. Education is often the most burdensome of these: Putting even one child through college may cost upwards of $100,000 in today’s dollars. Fixed costs like mortgages, car loans, and health insurance plans must be taken into account as well. Smaller but still-significant costs like fuel and utility bills shouldn’t be overlooked.

If there are small children in the house, it may be unreasonable for a policyholder to expect their spouse to be able to work full-time and take care of the kids simultaneously. Policyholders with young dependents should increase their premiums to account for this additional loss of future income. In many cases, life insurance shoppers may benefit from using a third-party life insurance calculator.


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Liran Hirschkorn

Liran Hirschkorn is the founder of His mission is to help individuals across the country in finding the best rates on life insurance as well as helping individuals with high risk life insurance.

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